Amazon Upgraded As Emerging Markets Provide A Mixed Blessing

NEW YORK ( TheStreet) - Investors may be discounting Amazon.com's ( AMZN) international growth prospects and, in particular, its investment in China, according to Morgan Stanley analysts.

On Monday, Morgan Stanley raised its outlook on Amazon shares from 'equal-weight' to 'overweight' on a belief that investors don't fully appreciate the company's growth prospects in emerging markets where e-commerce sales are on the rise. Meanwhile, the Morgan Stanley analysts, led by Scott Devitt, also note that Amazon's fulfillment network is "underappreciated," and may help drive operating margin growth.

Such a perspective indicates that some expect Amazon's expensive push into emerging markets will eventually pay off, even if it proves to be a drag on 2013 earnings.

"The market may be underestimating the sustainability of Amazon.com's international sales growth," writes Devitt, in the Monday client note, which values Amazon at $325 a share. "The lowest-hanging fruit appears to be payments infrastructure. Both Brazil and Russia have relatively low levels of credit card penetration," adds the analyst, while noting that the company's fulfillment assets may help drive profits and international expansion.

Notably, the upgrade sees positives in Amazon's international business, which weighed on the company's recent earnings. Currently, spending on key emerging markets such as China represents one of Amazon's biggest earnings and cash flow drags, as the company plows billions into an e-commerce market share grab.

"Market opportunities such as Brazil are complex and not without risk," writes Devitt. " The long-term merits of emerging markets warrant significant capital investments, however, Amazon.com may stretch investor patience too thin by embarking on a multi-front expansion strategy into multiple BRIC countries... an 'all-in' expansion strategy into Brazil, Russia and India would likely introduce a high-level of execution risk," the analyst adds.

Devitt also see a slow ramp up of other Jeff Bezos growth projects as a catalyst to near-term earnings. Notably, the Morgan Stanley analyst sees reason to be optimistic that strong Apple ( AAPL) iPad and iPhone sales could benefit Amazon. "Continued strength in Apple's iPhone and iPad products will be incrementally negative for Amazon.com's transition from physical to digital media products," writes Devitt.